Archive for July, 2009

• It’s the Zero-Down, Stupid
  Eddy Elfenbein, July 6th, 2009 at 11:23 am

  The WSJ has a fascinating article on what caused the foreclosure crisis. It wasn’t subprime. Instead, it was no money down:

  The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. The accompanying figure shows how important negative equity or a low Loan-To-Value ratio is in explaining foreclosures (homes in foreclosure during December of 2008 generally entered foreclosure in the second half of 2008). A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures.
  Further, because it is difficult to account for second mortgages in this data, my measurement of negative equity and its impact on foreclosures is probably too low, making my estimates conservative.
  What about upward resets in mortgage interest rates? I found that interest rate resets did not measurably increase foreclosures until the reset was greater than four percentage points. Only 8% of foreclosures had an interest rate increase of that much. Thus the overall impact of upward interest rate resets is much smaller than the impact from equity.

• A Possible Trading Scandal at Goldman
  Eddy Elfenbein, July 6th, 2009 at 11:22 am

  Well, this is interesting:

  Did someone try to steal Goldman Sachs’ secret sauce?
  While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution—that sources say is none other than Goldman Sachs.
  The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.
  The platform is one of the things that apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow the firm to make highly-profitable automated trades.
  The criminal case has the potential to shed a light on the inner workings of an important profit center for Goldman and other Wall Street firms. The federal charges also raise serious questions about the safeguards Wall Street firms deploy to protect their proprietary trading systems.

• Amsterdam to Consider Bailout…for Prostitutes
  Eddy Elfenbein, July 4th, 2009 at 9:27 am

  Amsterdam is considering bailing out prostitutes. Although I’m sure if prostitutes want to be associated with a profession as unsavory as banking.

• Happy 233rd Birthday!
  Eddy Elfenbein, July 4th, 2009 at 9:09 am

  

• The SEC Bash
  Eddy Elfenbein, July 3rd, 2009 at 5:14 pm

  The SEC Historical Society — not the SEC, mind you — just threw a big bash celebrating the commission’s 75 years of sucking ass. My invitation must have gotten lost in the mail.

  A giant screen projected images of SEC luminaries over the diners, who savored main course selections that included port wine and orange-glazed rock Cornish game hen. Each attendee was given a hardcover, elaborately produced book commemorating the occasion with photos from the commission’s history, including Joseph P. Kennedy giving a press conference in 1934 and the all-female 1939 SEC bowling league.
  The dinner was financed by donors to the Historical Society who purchased tables ranging in price from $3,500 to $7,500 and placed notices in the bound book congratulating the commission on its achievements. (“Each new day presents an opportunity to celebrate,” read the ad from Fidelity Investments. “A blue ribbon achievement? It certainly is!” gushed a full-page ad by the accounting firm Ernst & Young.)
  Tickets cost $250 per person but $50 for SEC staffers or government employees.

  Yes, these are same folks guy missed Bernie Madoff even when they were told exactly what was going on. Here are some more details of the SEC’s incompetence:

  The internal watchdog at the Securities and Exchange Commission revealed Monday his office is investigating several employees, including one top SEC official, after receiving complaints alleging they improperly disclosed non-public information.
  One pending investigation by SEC Inspector General H. David Kotz comes in response to an allegation that a top SEC official improperly disclosed non-public information to a large investment bank.
  In another case, Kotz reported that his office is investigating two enforcement attorneys for possibly disclosing non-public information from an internal SEC database to a corrupt FBI agent and short seller who was later convicted of fraud, racketeering and conspiracy.
  Then, in yet a third case, the inspector general said he’s looking into whether a former SEC attorney may have revealed confidential investigative information in a book he wrote. Kotz said the attorney may have provided the privileged information to a company where he worked as a lobbyist after leaving the SEC.
  Separately, his office is also trying to determine if non-public information may have been disclosed to a national news outlet.
  Kotz, who is leading the internal investigation into the agency’s failure to detect Bernard Madoff’s Ponzi scheme, disclosed some details about his pending investigations in his newly published semi-annual report to Congress on Monday.
  In it, he said he has 19 pending investigations, one of which is tied to the Madoff failings.

  Poltico notes that the dessert options included rum baba with tropical fruits and berry coulis.

• NYSE Cuts Trade Times to 5 Milliseconds
  Eddy Elfenbein, July 3rd, 2009 at 5:10 pm

  Back in my day, we didn’t have any of this new-fangled quick stuff. If we got executed in 300 milliseconds, we were thankful — dagnabit!!
  NYSE Cuts Trade Times to 5 Milliseconds

  NYSE Euronext cut order-execution times 20-fold at the New York Stock Exchange, part of an effort to catch up to faster competitors that have taken market share.
  With the implementation of a new system for processing orders on the NYSE, customers will see trades executed within five milliseconds, compared with 105 milliseconds previously. As recently as 2007, the time was 350 milliseconds.
  That change is huge in the realm of high-frequency trading firms, which now measure time by the microsecond, or one-millionth of one second.

• The Savings Glut
  Eddy Elfenbein, July 2nd, 2009 at 1:27 pm

  Brad Setser looks at the role of the savings glut. I think this topic has been beaten up unfairly:

  In a global economy, a rise in savings relative to investment in one part of the world necessarily implies a fall in savings relative to investment in the rest of the world; sorting out why key macroeconomic variables change is always difficult.
  Maybe this equilibrium was a function of excessive demand stimulus by the advanced economies in the aftermath of the last recession – and lax financial regulation that allowed households to over-borrow. High US and European demand allowed the emerging world to save more. Maybe it was a function of policies in the emerging economies, policies sometimes put in place to support undervalued exchange rates. That would explain why the growing US savings deficit didn’t put upward pressure on global interest rates and why the rise in the US external deficit didn’t lead to a rise in US real interest rates — something would have short-circuited the housing boom. Probably it was a mix of both. Emerging market savers (really their governments, as private savers weren’t exactly seeking out depreciating dollars) helped to provide Wall Street and the City the rope they (almost) used to hang themselves.

  If you ever want to punish another country, don’t send in tanks — just lend them too much money.

• If You Were Concerned About Death Threats Against You, Would You Go on TV and Talk About the Death Threats Against You?
  Eddy Elfenbein, July 2nd, 2009 at 11:17 am

  Me neither.

• The June Jobs Report Majorly Sucked
  Eddy Elfenbein, July 2nd, 2009 at 10:41 am

  The Labor Department released its jobs report this morning and the results were pretty lousy. Employers slashed 467,000 which was far more than forecasts. The unemployment rate is now up to 9.5%.
  Since the recession started, we’ve lost 6.5 million jobs.
  

• Time Looks at BBBY
  Eddy Elfenbein, July 2nd, 2009 at 10:24 am

  Time‘s Sean Gregory looks at Bed Bath & Beyond (BBBY):

  Call it the Bed Bath & Beyond barometer. Some recent data indicate that as consumers prepare to open up their wallets, they’ll be very likely to spruce up their homes. According to a survey from WSL Strategic Retail, of shoppers who say they want to splurge, 44% want to do so on their digs. NPD Group, a market-research firm, also found that when shoppers are asked where they are most likely to spend money, a majority point to their homes. “The nest is where we’ll likely see the early signs of a recovery,” says Marshal Cohen, a retail analyst at NPD Group.
  On a June evening at a sprawling Bed Bath & Beyond store in New York City, a checkout line snaked around the corner as consumers hoarded pots, soaps and Cuisinarts. “Your home is your place of comfort, the only thing you can count on,” says Tina Genitti, 21, while carrying a featherbed, a pillow and body creams to the checkout line. “A few months ago, I would have gone for the cheap featherbed. But I spent the extra $5 here because it’s time for a treat.”