Thursday, November 26, 2009

Krugman says Timmy G is on Wall Street's payroll

Don't blame the messenger (link):

.... the Turner-Brown proposal, which would apply a “Tobin tax” to all financial transactions — not just those involving foreign currency — is very much in Tobin’s spirit. It would be a trivial expense for long-term investors, but it would deter much of the churning that now takes place in our hyperactive financial markets. This would be a bad thing if financial hyperactivity were productive. But after the debacle of the past two years, there’s broad agreement — I’m tempted to say, agreement on the part of almost everyone not on the financial industry’s payroll.
and yet....
Unfortunately, United States officials — especially Timothy Geithner, the Treasury secretary — are dead set against the proposal.
 As to substance:  it's taken a while but kudos for finally picking up on this. Better late than never, I suppose. But, Mr. Krugman, I urge you to do more – because the reform of our financial sector is very, very important, and a Tobin tax is an easy-to-implement first step that should reduce this endless trading activity that brings little tangible accomplishment.

So write about how HFT/algo trading is now dominating our exchanges. Write how many transactions are done through "dark pools". Write how all of these split-second trades that are managed by computer models have the capability to rapidly inflate (and deflate) bubbles in stocks, oil, metals, currencies, credit swaps and anything and everything for which a symbol exists on the Bloomberg terminal. Write how formation of the bubbles has been ever more rapid and ever more frequent thanks to the sloshing liquidity in financial markets. Write how the injections of monetary stimulus would, in the ordinary course of affairs, result in more permanent allocation of capital to socially useful projects with long term returns (infrastructure, energy, biotech, etc.), and yet because finding such socially useful investments requires hard work, have instead ended up fueling the rapid rise of the financial sector. Write about why the foregoing results in a complete abdication of Wall Street's raisón d'etré: efficient allocation of capital.

Write incessantly, because (a) persistence pays off, and (b) if the message has any hope of getting accross, it must saturate the consiosness of those who pay attention and our powers that be. You have an unparalleled forum to air your views and an air of authority to boot – use it!

End of (Dubai)World

And what the hell did they expect??? - just sweeping those streets from the ever encroaching desert sands is expensive enough, not to mention their infamous indoor ski resort and all the energy and water that it requires. Clearly, an infrastructure with water consumption per capita among the highest in the world IN THE MIDDLE OF A FREAKING DESERT and the highest energy consumption per capita, period, is the very definition of unsustainability - environmental, economic and otherwise. If Las Vegas' very existence is a crime against nature, then I have no idea what the proper name for Dubai and its neighbors should be.

So what about those loans - how much of a haircut would they want to get. Well Dubai World has about $58 billion in liabilities  (~$80 bln for Dubai as a whole) and had $99.6 billion in assets at the end of 2008. What are those assets worth now? Well, I don't know exactly, but I can guess. Considering that most of the collateral is in the form of empty skyscrapers, palm-shaped islands that are half-built and other unfinished construction sights, and conisdering that property values in Dobai collapsed anywhere from 50 to 70 percent from peak, Dubai should be far beyond the point of technical insolvency. Abu Dhabi's continued support has enabled them to use the "extend and pretend" tactic to much success up until now, but apparently no more.

If contagion spreads, and the newly inflated stock and commodity bubbles, including oil start to pop again - we might loose a venue or two and Emirates might just stop sponsoring Ferrari (and if you think there are no bubbles, I have a small island to sell you).

Monday, November 9, 2009

The continuing saga of Wall St compensation

Per Bloomberg, the top 3 wall street firms are on track to increasing their total compensation to the bonanza year of 2007. Absurd does not begin to capture it.

NB to Ken Feinberg, as he wrestles with how to best align wall street compensation to performance: with aggregage compensation that high, it makes absolutely zilch of a difference in how you structure it. Obviously, a clawback for the whole pay package is an unrealistic condition to impose - one needs to put fuel in his Ferrari after all. Ditto for deferred stock compensation that vests in X number of years. That leaves the choice of cash, options and outright stock awards for the majority of that multi-million dollar bonus. And here's the thing: if I am getting paid that much, I frankly don't give a damn if the performance of my company suffers in the long term. The whole outlook becomes a short term one: make a killing for 3-4 years, then quit, cash in all of those options and stocks, and retire comfortably. Hell, the top dogs at Goldman could really afford to quick anytime they goddamn please: you can get close to a 4% yield tax free on a long term muni index, which, if you net $10 mil in a single year and stash it away, can enable a fairly comfortable lifestyle so long as you stay the fuck out of the money black-hole that is NYC.

At that point in the compensation scale, increments in compensation can only provide bad incentives. If providing for your long-term well being is no longer at issue, what would YOU care about? If the answer is of a "mine's bigger than yours" type - correcto mundo!

So, you want to encourage conservative investment behaviour at wall street banks, Ken? Start by making people fear about putting bread on the table. Prison sentences handed out willy-nilly could also do wonders, but you can't put every i-banker in jail, can you Ken? Can you?