Monday, September 14, 2009

A galaxy far, far away...

Every one is going to be doing these "One Year Later" pieces. I'm not going to give you a retrospective on what the government could have done. I've made my position well known. I'm also not so arrogant as to claim that I know how much things would have been different. If we had bailed out Lehman, then would we have bailed out Wachovia? Or AIG? Would Wachovia have failed if not for Lehman? What about WaMu? Or Merrill? If Lehman had managed to survive, could Merrill (Or Morgan Stanley, or anyone else) have been the one to trip us into the crisis? Who knows. Its entirely speculative. The only thing that's inside that cave is what you bring with you.

I do think its very interesting to consider how much things have changed, or not, since last September. So I'd like to begin a discussion on what's better, worse, or no different since before the Fannie/Freddie bailout on September 7. I'm going to start with a few points, and wait for others to come in via comments or e-mail (accruedint at In each case, I want one or two sentences (per point) as well as numerical evidence to back you up.

Here are a few:

  • US GDP 2Q 2008: +1.5%. 2Q 2009: -1.0%
  • Consumer credit: 8/31/08: $2,576 billion, 7/31/09: $2,472 billion (-4%)
  • Goldman Sachs 5yr CDS: 9/5/08 +160, now +120
  • Home Equity Loan ABS issuance: 2008: $4 billion. YTD 2009: $0
  • CMBS issuance: 2008: $27 billion, YTD 2009: $0
  • Fannie Mae 30-year commitment rate: 9/5/08 5.887%, now 4.692%
  • Bank's loss reserve as pct of total loans and leases: 2Q 2008: 1.81%, 2Q 2009: 2.77% (from FDIC quarterly banking profile)
  • Bank's equity capital as pct of total assets: 2Q 2008: 10.16%. 2Q 2009: 10.69%.

So there are just a few to get us started. I'll continue to post additional ideas of both my own and others as the week progresses. Thanks in advance for your comments.


Anonymous said...

I fail to see what is the big deal about Lehman going under. Lehman was always the weak sister among the investment banks and always had a much lower stock market valuation because of this. It seemed a no-brainer that Lehman wouldn't survive the next big recession and/or financial dislocation.

Clearly, it's failure is vastly overblown in the news media.

Anonymous said...

'Too big to fail' leads one well into 'big enough to use anti-trust laws to break up'.

Constructive actions to take now:
- standardize and publically list credit default swaps bid/ask and trade history
- standardize and publically list normal corporate, cmbs, abs, 144a bonds bid/ask and trade history
- prevent recent forms of market manipulation such as buying credit default swaps and then short selling the company stock to near Zero. Should be covered under rules similar to doing the same with a put option and short selling the stock
- require public traded corporations to list their debt structure every 3 months as a part of their quarterly sec earnings filing. This would list all outstand debt, maturity, coupon, etc. This is internally maintained and used in computing quarterly earnings already. Require company to provide issuing documents for those debt securities on its web site for debt that was issued to the general public.
- Require stock, bond, commodity, option dealers, brokers to trade for their customer's account before their own (no flipping of muni issues, no flipping of IPOs). This requires a public auction market for new issues. Can already be done with existing exchanges on a 'when issued' basis with a public bid book.
- Require structured debt products (cmbs, abs) to report their operations as if they are a closed end fund to the SEC. This will be the basis of public collection of long term data to compare cmbs versus other cmbs for valuation purposes.

In general, move things in OTC (e.g. bonds, cmbs) or beyond OTC status (e.g. CDS) to OTC status with a pubic viewable and SEC reportable status.

General: Show the debt structure of corporate entities in a clear and public place (e.g., SEC filing) so that Enron, Lehman over-leverage are avoided.

Lastly, give municipalities 5 years to provide their financial reports with 45 days of the end of a quarter, fiscal year, etc. Prevent new issues of debt for 5 years for entities failing to file annual reports sooner than 45 days after the end of the fiscal year.

The lack of enforcement, lack of good financial compliance, lack of timely accounting, lack of accurate financial information leads the US/UK well downwards to the pretend status of unregulated/unenforced financial systems (e.g., Russia).

Anonymous said...

- Don't let stale ratings (moodys, s&p, fitch) older than 3.5 years be used in selling, marketing, or reporting of debt securities. Many active corporate issues have ratings from 2001 or earlier and are considered 'investment grade' based on those obsolete ratings.

wagner2626 said...

Size of Fed Balance sheet - Sept '09 - 2.125 Tn Sept '08 0.943 Tn

Value of FTSE all world stock index (FTAW01 - BBerg Ticker) Sept '09 $24.5Tn Sept '08 $26.6Tn - Frankly I think this is amazing we are only 7% lower in wealth in the stock market globally and this is not a dollar effect (see next)

Value of the USD (DXY Index on Bberg) Sept '09 76.6 Sept '08 78.9 only a 3% change

Accrued Interest said...

One stat I'm trying to get is total assets of the top 10 (or 20 or whatever) financial institutions. I can get just banks, but we saw with Lehman and AIG that too big to fail extends beyond banks. My suspicion is that more assets are concentrated in the top 10 today than 1 year ago. If anyone knows where I could find such a stat let me know.

Anonymous said...

AI, they're all public right? You could use the most recent balance sheets, although adjustments might be needed for off balance sheet entities.

Accrued Interest said...

Yeah I'm working along those lines but wish we had off balance sheet assets. Also wish we knew counter-party exposure but that kind of data would be highly syspect.

erdento said...

Well, I come to this site not because I really know that much about the bond markets but because I'm trying to learn more. This, however, does have a benefit: my replies may have additional humor beyond my intent.

-US GDP: All banking crises worth their salt inflict economic damage beyond what recessions ordinarily do, even when a recession affects the banking and credit sectors. The evidence here is not numerical but the sign in front of the number, and it, like the effect, is negative.

-Consumer credit: When the mean level of consumer credit as a percentage of GDP for decades is in the 60% range, then climbs to the 70% range, and then heads back to the mean, we have a problem that lies not just in the number but the sign preceding it, and that'd be negative. As in negative credit growth equals a subtraction from GDP as the line of the mean welcomes its long lost friend that may stay around a while this time.

-Goldman Sachs: Oh, thy name is treachery, but with a CDS rate that rises and falls with that of the USA itself, for their fates are wed but not by chance. I mean, its hard to tell, with so many fed members, treasury secretaries, and administration officials bearing their mark, is it possible for them not to prevail. Buffett doesn't seem to think so, either.

-Home Equity ABS: Sure this is down a bit, but at least the government's doing a bit better: its share of the mortgage market is effectively up to 80% as reported in today's WSJ. See, I'm not such a glass-half-empty-kinda-guy after all!

-Fannie Mae 30yr: Who said the government can't accomplish anything? Certainly not the markets when what was an implicit guarantee turned a bit more explicit with Fannie's move into a conservatorship on 9/7/2009.

-Bank loss reserve: Sure, the reserve rate has gone up, but at least the NPLs have grown, too. And no complaining from the FDIC. Nobody, including the Treasury wants to hear that, especially when you Mr. Regulatory Agency have to go to them to get recapitalized because you're down to your last 10 billion or so. On the bright side, that frumpy, soon to be publicly humiliated FDIC, could point out that the one bank they don't regulate--I think we're talking about the FED, here--might need some recapitalizing of its own some day. Oooops, that would require an audit, and I guess we're not having one of those any time soon.

tj said...

have a few more comparisons-
sub prime issuance: 2008 - $0
2009: $0.
approximate years to ARM resets:
2008: 1
2009: 0
approximate years to option ARM recasts:
2008: 3
2009: 1? (negam caps being hit already).

also - i love your site - i started following because of your great coverage of the bond insurers (as a former employee of one, you had the best work on the internet, but i was too depressed to comment back then).
i should have a post up tomorrow on comparing Lehman's collapse to my company's - take a look if you get a chance.